The S&P 500 ticked up 0.1% as of 4 p.m. ET on the back of gains in European stocks reversing a three-day slide and all but relegating the ghost of Christmas past back to the closet.
A slew of macro-economic data released overnight highlights the slower growth trajectory that the economy is tackling. Consumer Confidence slipped again, and PCE inflation declined month-over-month. However, the labor market exhibits more resilience, with weekly jobless claims falling a bit further than expected. But I do not think this data comes as much of a surprise to anyone and merely echoes the need for both monetary and fiscal policy to do much of the heavy lifting until the vaccine rolls out.
And good news coming from ongoing vaccine distribution is allowing investors to look through the poor economic data.
I think you can always weave a reflate or deflate tale to suit the daily narrative. Still, the underlying story remains a vaccine driven theme entirely, where the projected acceleration in the pace of vaccinations through H1 should, in turn, drive much stronger services consumption and support both the rally in stocks and oil, where the gains will be mostly frontloaded in Q2.
The long vaccine runway suggests more price evolution in 2021 for stocks and oil. As more people get vaccinated, they are likely to return to those activities most impacted by COVID-19, such as dining out, traveling, and other personal service-related areas. So, I suspect we will quickly shift from mobility data to the number of people getting vaccinated as the best leading indicator for oil and stock markets.
The market dismissed President Trump's veto threat as largely irrelevant noise while turning the focus on the Brexit deal where the odds of a pre-Xmas trade agreement accelerated if the latest run headlines are for real. So, the never-ending ebb and flow of Brexit headline roistering might finally see closure on the most widely contested divorce in the history of humanity.
However, late NY sterling trades are changing hands 70 pips off the headline highs as 'Cable" traders are still tethered to the end of the Brexit yo-yo, and now the can is getting kicked, setting the deal up to be a grand old Christmas Eve celebration. Let us hope for FX trader sanity checks the powers to do not deliver a plate of rotten fish.
As such, there has been mildly correlated backtracking on the remarkable US market's price action overnight with stocks and oil coming off the boil a touch but still simmering.
We are still waiting to hear from Trump as this post lands, but House GOP Leader McCarthy indicated President Trump has not decided on vetoing the fiscal relief bill yet.
How Far Can Sterling Go?
How far could sterling rise in the event of a deal? On Tuesday, broad market consensus was that around 70% of a deal's value was priced, and looking at price action so far overnight, that moved to 90% or higher at a full blow. Hence cable may not go much beyond 1.36 and might then be vulnerable to profit-taking, particularly on EURGBP, which has been the more popular expression.
Oil markets
The oil market rallied along with broader markets supported by a flat-out bullish EIA inventory report.
And thanks to medical experts warning against overreaction to the new virus strain, there is a greater understanding it will not trigger a new wave of severe lockdown blockades around the world as France showed the way by quickly reopening trade and transport links with the UK, which provided a major sigh of relief to oil markets for a lockdown perspective.
Sure, we will have a Christmas light this year, but with such a long runway for oil prices to move higher through the end of 2021, although the consensus is not all priced in. And when you start to factor in planes, trains, automobiles, trucks, and cargo ships moving actively around the world again through the normalizing process when the old supply chains kick in, the reality is oil markets never relinquished the bid on dip mentality as for each 50-cent sell-off there was a multitude of call options getting written beneath the surface.
Forex Markets
All about Brexit
Weaker US economic data and sterling's repricing higher on the back of hopes for a pre-holiday Brexit deal saw the dollar traded broadly lower.
The euro is up a bit but struggling to shift significantly higher in the face of pre-Brexit EURGBP selling, which is a viral expression for a pro-Brexit deal.
FX traders are still trying to squeeze the last bit of juice out of the Brexit deal before heading home for Christmas.
The Aussie is holding up well given its strong risk beta to US stocks despite the technical repricing of iron ore lower due to position limits on the Dalian exchange as regulators try to reduce market froth and position risk.
Improving risk sentiment and higher oil prices should see the Malaysian ringgit trade more favorably today, but activity should be light as traders move into full bore holiday mode.